Real Estate Company Cannot Be Labelled Shell Entity Merely for Huge Transactions and Low Initial Profit: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Delhi Bench, quashed reassessment proceedings after observing that the Assessing Officer had wrongly treated the assessee as a shell company without examining the nature of its real estate business and underlying assets.

The assessee, Demas Developers Private Limited, was engaged in the business of real estate development and had been incorporated on 06.07.2010. During the relevant assessment year, the company was in the initial stage of its business operations and had acquired substantial land for real estate development activities.

The Investigation Wing reported that the assessee had negligible turnover and profits despite huge unsecured loans and high value banking transactions. It was alleged that the assessee was being used for layering of funds and providing accommodation entries.

Relying upon the information received from the Investigation Wing, the AO reopened the assessment and treated the assessee as a shell company. Addition of Rs.108 crore was made under Section 68 of the IncomeTax Act in respect of unsecured loans received from related parties.

The CIT(A) granted partial relief after holding that the assessee could not be treated as a shell company merely due to absence of operational revenue or profits.

Aggrieved, both the assessee and the Revenue preferred appeals before the Tribunal.

Before the Tribunal, the assessee contended that the reassessment proceedings had been initiated solely on the basis of information received from the Investigation Wing without any independent verification by the AO.

The Revenue supported the reassessment proceedings and challenged the relief granted by the CIT(A).

The Tribunal comprising Anubhav Sharma (Judicial Member) and Manish Agarwal (Accountant Member) observed that the AO had merely relied upon the Investigation Wing report without examining the fact that the assessee was a real estate development company which had acquired substantial land and incurred expenditure towards statutory approvals.

The Tribunal further observed that low turnover or profits during the initial years of a real estate project could not by itself justify treating the assessee as a shell company, particularly when substantial land had already been acquired.

Accordingly, the Tribunal held that the reassessment proceedings were based on borrowed satisfaction and quashed the assessment order.

The assessee’s appeal was allowed.

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